[Editor’s note: This is part one of a two-part series by Jos Algra on the causes and effects of the coffee’s current price crisis. Part two will go into much more detail about the relationship of the New York C price to specialty coffee roasters.]
September 20, 2018, marked an important day in the world of coffee, when the New York C price for washed Arabica coffee fell below 100 cents per pound, reaching its lowest level in 12 years.
The current rally to the bottom started on the Nov. 8, 2016 — coincidentally, another historic day, as Donald Trump was elected president of the United States — when the “C price” was around 180 cents per pound. Since that time, we have seen 22 months of price drops. We can’t predict the market, but we’re all wondering what will happen next: 93.5 cents? 84.5? 70?
Why has the coffee price fallen so low?
There is a bumper crop in Brazil of more than 60 million bags; Vietnam may end up with more than 30 million bags; and global output in the 2018/19 season may be over 170 million bags, which is 10 million more than consumption.
However, these fluctuations have been on the market’s radar for a long time, as the next harvest in Brazil will be lower, possibly by 10 to 15 percent, and some five million bags may be held back for next harvest. In short, supply and demand over these next two seasons is expected to be more or less in balance.
To understand the price collapse, we must look at the short term, where it is the funds that determine the price. In 2017, more than 9.4 million coffee contracts were traded on the New York futures market alone — equivalent to 2.7 billion bags of coffee, 16 to 17 times as much as global annual output. The futures markets outweigh supply and demand on the physical market in price setting.
On the Aug. 21, 2018, large speculators had a net short position — meaning to bet on a lower future price — of more than 106,000 contracts, or the equivalent of 30.1 million bags. With the 5.5 million bags short in London, that represented more than 20 percent of annual coffee production. On Nov. 8, 2016, when the steady downward slide began, the funds were almost 59 thousand contracts long, betting on a price increase.
How a price collapse affects farmers
The C price has not yet reached the level of 40 to 50 cents, like it did in the two most recent price crises (1989-1994 and 2000-2005), but costs have increased and currencies have devaluated. Adjusted for inflation, 100 cents now is near the same as 50 cents back then. Governments of producer countries — including Brazil, Colombia and Honduras — are protesting against the perversion of the coffee market, and discussing drastic measures to support their farmers.
Unfortunately, it is unlikely that the market will react. since the end of the ICO price regulation in 1989, all attempts to stop price crises on a global scale found little to no success.
Specialty coffee roasters may claim that they pay a good price, far above the New York C market, but that’s just a small volume. Not all coffee is grown at the top of high mountains and most washed Arabica is sold against the C price (more on this in the next column). Fairtrade offers a bottom price for the coffee of $1.60 USD per pound for conventional washed Arabica ($1.90 for organic), but that, too, is a limited volume, and certified farmers only sell a third of their production as Fairtrade. Other certification schemes that don’t address the issue of base price, like Rainforest and UTZ, are challenged to make sustainability claims.
In the two other major price crises over the past 30 years, prices held below 100 cents for five to seven years. What we’ve seen when that happens is farmers first cutting back on inputs, pesticides and other farm-related expenses. From there, the next step is often to cut back on education or other family expenses before, eventually cutting back on necessities such as food. The only other option beyond that is to abandon the farm altogether.
So what does the price drop mean for farmers? I still have the image, burnt into my retinas, of seven poor coffee farmers who died in the Arizona desert in 2001, driven from their farm and their country by the low coffee prices.
Since 1989, Jos Algra has worked as an exporter, broker, researcher and consultant, with a focus on sustainable supply chains, management and organization, finance, trade and price risk management. With a focus on smallholder farmers, Algra has worked on behalf of producer organizations, ethical lenders and Fairtrade International, among others.